Will PM Modi's 'Korea Plus' Channel Help POSCO Investment?

Economic Diplomacy

South Korea is one of the largest investors in India. POSCO’s proposed investment in the steel plant in Odisha’s Jagatsinghpur district is slated to be the highest so far at $12 billion

Prime Minister Narendra Modi’s hope of mobilising Foreign Direct Investment (FDI) for bolstering growth and creation of job may meet its first casualty if the South Korean steel major POSCO takes a firm stand on withdrawing from its proposed project in Odisha. The main reason for this sorry episode would be not providing a mining lease on an out-of-turn basis in the spirit of the Bilateral Investment Promotion and Protection Agreement (BIPA) signed between the two countries way back in 1996.

South Korean investments in India surged after signing of this agreement and touched $3.8 billion by December 2014. South Korean companies forayed into India much before the ‘Make in India’ programme was officially launched by PM Modi. South Korean companies source locally, causing local contentment, and facilitating indigenisation. From its manufacturing base in Chennai, Hyundai Motor India has exported about 2.2 million cars to 123 countries in five continents. Its success story is such that with a total investment of $2.7 billion, its yearly turnover is about $5 billion and it has created about 150,000 direct and indirect jobs, including dealers and vendors.

India has urged Hyundai to set up another manufacturing base in the country. Apart from Hyundai Motors, LG, Hyosung, KC Cottrell, R-Land, Shop CJ, Mirae Asset, and Samsung are among over 649 companies present in India, covering various sectors such as automobiles, power and industrial systems, refrigerating and air control equipment, apparel, home shopping, and asset management. Some of these companies are household names in India.

South Korea is one of the largest investors in India. POSCO’s proposed investment in the steel plant in Odisha’s Jagatsinghpur district is slated to be the highest so far at $12 billion. The termination of this project could send wrong signals to foreign investors, particularly those from South Korea, when India is seeking investments in defence products, IT, infrastructure, energy, audio-visual industry, LNG tankers, ship building, and smart cities.

What is the problem in getting a mining lease? The Mines and Minerals Development and Regulation (Amendment) Act recently passed by Parliament mandates the auction route for getting mines on lease. The Modi government has insisted that the bidding process should be transparent to avoid any irregularities. POSCO has been told to join the bidding process.

But Prime Minister Modi needs to find a way out to give POSCO the mining lease, because it was the Indian government that invited POSCO and promised to promote and protect the massive investment of $12 billion (largest FDI so far) by signing the BIPA. Since the Modi government is seeking FDIs to bolster growth, and calling for Ease of Doing Business and campaigning for Make in India, solving the POSCO tangle could send a positive signal across the globe, especially since confusion still prevails over the issue of retroactive taxation.

During his recent visit to South Korea, Mr. Modi said, “We will establish a channel–Korea Plus–to facilitate their investment and operations in India.” Will this “Korea Plus” channel help POSCO in getting a mining lease? Will the government make such special channels to facilitate investments from other countries with which it has entered into similar bilateral investment promotion and protection agreements?

Odisha Chief Minister Naveen Patnaik has done his bit in providing land to POSCO despite strong opposition from activists. POSCO India had entered into an agreement with the Odisha government in June 2005 for setting up of a 12 million tonne per annum (mtpa) steel plant in Jagatsinghpur district at an investment of $12 billion on a 4,000 acre land. Subsequently the company scaled down the plant capacity to 8 mtpa and said that it needed 2,700 acre land. The state government has already provided 1,700 acres of land to the company.

For the first time, in 2006 the state government had recommended in favour of POSCO to get prospecting licence over Khandadhar reserves in Sundargarh district. However the then UPA government led by Dr. Manmohan Singh refused to consider the case separately and asked the company to participate in an open bidding.

Later, when the BJP-led government came to power at the Centre, the state government renewed its request for POSCO three days before promulgation of the Mines and Minerals Development and Regulation Ordinance. Now the Central ministers have begun trading charges. The Union Minister of state for Petroleum and Natural Gas, Dharmendra Pradhan has alleged that the state government recommended POSCO’s case only three days before the promulgation of the Ordinance that mandates auction of mines. The Union Minister of State for Commerce and Industry, Nirmala Sitharaman said, “the state government had neither sent any such Letter of Intent nor renewed the Memorandum of Understanding before the promulgation of the Ordinance.”

However, to resolve the uncertainty over POSCO getting mining lease, the Odisha Steel and Mines Minister, Prafulla Mallick, suggested that the state government PSU, Odisha Mining Corporation, will supply iron ore to meet POSCO’s demand so that it can produce 12 mtpa crude steel and 11.28 mtpa finished steel.

But the tussle between the state and the Union governments and the growing uncertainty over its mining lease led POSCO to withdraw from Hardaspur-Paradip rail project, crucial for the company to source raw materials for its plant and also links to the Paradip port for exports. Refusing to pay Rs. 54 crore ($8.4 million) demanded by the state government’s IDCO for land acquisition, it has instead asked for the refund of about Rs. 27.5 crore ($4.3 million) paid earlier.

Even as the POSCO’s Odisha project has become a bitter pill, the South Korean major is in talks with the Indian public sector SAIL for setting up of an integrated steel plant of 3 mtpa capacity in Jharkhand. It may be recalled that earlier talks between POSCO and SAIL for a steel plant at Bokaro failed on ownership issue. POSCO was demanding a majority stake to which SAIL did not agree.

Prime Minister Modi had assured President Park Geun-hye during his visit to South Korea that he would resolve the POSCO issue. He had given assurances earlier also when they met at the East Asia Summit in Myanmar. Mr. Modi intends to resolve the issue through a separate “Korea Plus” channel. It is to be seen how this materialises. POSCO’s withdrawing from the $12 billion project will definitely have an adverse impact on the ‘Make in India’ and ‘Ease of Doing Business’ campaigns.

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